The Dept. Of Education's Loan Default Unit Is In Disarray

The U.S. Department of Education’s internal unit that handles defaulted federal student loans is in complete disarray. A chronic staffing shortage is causing borrowers and their advocates to experience unprecedented, hours-long wait times – sometimes ending in dropped calls. This means that hundreds of thousands of student loan borrowers may be unable to reach anyone to help them to stop wage garnishments, tax refund seizures, or Social Security offsets. Other student loan borrowers seeking to access critical default relief programs like rehabilitation may be effectively trapped in default due to the Department’s inability to function.

By way of background, the Dept. of Education has two primary units that handle its sprawling portfolio of defaulted federal student loans: the Default Resolution Group (DRG) and the Debt Management and Collections System (DMCS). Because there are so many federal student loans in default, DRG and DMCS do not have sufficient capacity to handle all of the accounts, so the Dept. of Education outsources collections to several private, third-party debt collection agencies, which then assess substantial penalties and fees.

However, these defaulted borrower accounts are still effectively housed within DRG and DMCS, and not all student loan accounts are outsourced to third-party debt collectors, particularly accounts that only recently went into default. That means thousands of federal student loan borrowers have to deal directly with DRG and DMCS to resolve their defaulted federal student loans through programs like rehabilitation (which can cure federal student loan defaults). And there is an incentive for them to do so in order to avoid substantial collections costs and penalties that would be assessed if their accounts are placed with a third-party debt collector.

In addition, units within DRG and DMCS handle many elements of borrower accounts, even when these accounts are with third-party debt collectors. For example, borrowers who are contesting attempted intercepts of their federal tax refunds, and borrowers who are protesting offsets of their Social Security checks, must deal with the Federal Offset Unit of DRG/DMCS, even if their accounts are primarily being handled by a private third-party debt collection agency.

Since the beginning of January 2019 (around the time that the government shutdown began), borrowers calling DRG and DMCS have been forced to wait for hours before being able to speak with anyone. And even when they connect, the calls sometimes drop. Since not everyone has the ability to stay on hold for half of a working day or more, this means that thousands of student loan borrowers trying in good faith to fix their student loans may not be able to resolve their defaults for months – not because they do not want to, but because the Dept. of Education does not have the capacity to work with them. Other newly-defaulted student loan borrowers may not be able to prevent their accounts from being sent to a third-party debt collector – and thus subjecting them to needless (but substantial) penalties and fees.

An employee who works for DRG/DMCS told me that the problem is related to staffing shortages, coupled with high-volume calls during tax season (since people’s federal tax refunds are often seized when they have defaulted federal student loans). But the problem is completely unprecedented and has now been persisting for over two months – and the Dept. of Education has not acknowledged the problem publicly, or made any plans to address this.

Meanwhile, student loan borrowers trying to find a path out of default are stuck.